No track record but large order book. Earnings data for Modern Access is limited and stale. For FY08, Modern Access generated revenue of A$0.3m, and incurred a loss before tax of A$1m and loss after tax of A$0.7m. As at 30 June 2008, Modern Access's NTA is A$3.3m. We estimate that AusGroup is paying between 2.7x to 5.8x FY08 NTA for the company. Note that Modern Access was incorporated in January 2008, so these figures reflect less than six months of operation as essentially a start-up. With no real track record, we believe AusGroup is paying for the target's A$203m order book, its management, and a client base that includes Woodside, Exxon Mobil and MCC Mining.
Revising estimates. We have adjusted our earnings estimates based on the maximum 14.4m shares issuable. We estimate that Modern Access contributes about A$58m (29% of its order book) to FY10F revenue at a NPM of 3.6% (versus our 4% NPM estimate for the existing business). Success TBD. Several key uncertainties exist. The target's limited track record is offset in part by a large order book and blue-chip clientele. AusGroup's own acquisition track record is choppier. The 2006 buy Cactus Engineering has been a disappointment (in our opinion) with orders and performance below expectations. AusGroup's new management has enjoyed some success in overhauling the company's execution capabilities and perhaps it is unfair to judge them on past deeds. Still, that overhaul is a long-term work in progress and there are execution risks for new business. Our S$0.51 fair value estimate (prev. S$0.55) is pegged at 11x FY10 earnings - down from 13x previously to reflect increased execution risks. Maintain HOLD.
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